The Foundation for Economies Worldwide Is Small Business
Christopher Arnold | June 26, 2019
Most organizations worldwide are small by size, but their importance to both developed and developing economies and societies is indisputable. According to the World Trade Organization, small-and medium-sized enterprises (SMEs) represent over 90 per cent of the business population, 60-70% of employment and 55% of GDP in developed economies. SMEs therefore do not just significantly contribute to the economy – they ARE the economy.
The diversity and importance of SMEs is celebrated by the United Nations, the International Council for Small Business and IFAC as part of the UN Micro-, Small and Medium-sized Enterprises Day (#MSMEDay19) on June 27.
SMEs are an important part of achieving the UN Sustainable Development Goals, for example to ‘promote inclusive and sustainable economic growth, employment and decent work for all’ (goal 8) and to ‘build resilient infrastructure, promote sustainable industrialization and foster innovation’ (goal 9). SMEs are critical to achieving the SDGs.
This article examines how SMEs contribute to the global economy by exploring SME public policy, the importance of engaging professional expertise to SME success and establishing a robust evidence base.
Examining SME Public Policy
The importance of “think small first” is essential in developing public policy and regulation. The European Commission emphasized this principle in its 2008 Small Business Act, which called on policy-makers to take into account the needs and interests of SMEs from the earliest moment in policy formulation. This includes an SME Test, which involves consultation with SMEs and SME representative organizations, measurement of the impact on SMEs (cost-benefit analysis) and an assessment of alternative mechanisms and mitigating measures, if appropriate.
In 2018 IFAC was privileged to be a member of the B20 Argentina SME Development Task Force and had the opportunity to provide input on the policy position paper, including specific practical recommendations to the G20 covering:
- Talent Attraction and Entrepreneurial Skills Development
- Access to Finance
- Simplified and SME-Friendly Regulatory Framework
- SMEs’ Participating in the Digital Economy
One of the ten recommendations in IFAC’s Call to Action ahead of the 2019 G20 Summit includes creating an environment for SME growth and inclusiveness by:
- Enhancing SME access to the digital economy by investing in digital infrastructure and fostering innovation.
- Recognizing as a priority facilitating entrepreneurial and business skills development and increasing awareness of the importance of business transfers and succession planning.
- Renewing the commitment made by G20 countries to implement key SME policies, including the G20/OECD High Level Principles on SME Financing and the G20 High Level Principles on Digital Financial Inclusion.
SME policy is complex and covers a wide range of areas. It is widely accepted that a public policy framework that fosters a culture of entrepreneurship and innovation is beneficial. A number of actions may be taken to support entrepreneurship, including establishing education programs (e.g. business schools helping students get started on campus with incubator facilities) and promoting entrepreneurs as role models. However, questions arise on where interventions should be targeted and how countries can help create the right support environment and develop an ecosystem where SMEs can thrive.
While the overall problems faced by the SMEs are similar in different jurisdictions, there are significant differences in their priorities and needs in different countries. The reality is that small businesses are extremely heterogeneous in their size, age, sector, ownership, business models and aspirations and not easily addressed by any one-size-fits-all approach. The segmentation of the SME market is therefore vital for informed policy interventions, as well as establishing a robust evidence base.
It is important for all stakeholders to work together to improve the knowledge-base for policy making and for sharing best practice information. The 2018 OCED Ministerial Conference on SMEs resulted in 55 countries adopting a declaration on strengthening SMEs and entrepreneurship for productivity and inclusive growth that included agreement to continue the development, implementation and evaluation of effective policies for SMEs.
Key to SME Success: Engaging Professional Expertise
Research reveals that over 50% of new businesses fail during their first five years. Although SMEs can close shop for various reasons, and not all non-surviving SMEs represent “failures”, the importance of professional advice and expertise to help guide the business through the myriad of business issues is vitally important. Poor financial management is one of the leading reasons why businesses fail. Research indicates that professional business advice provided to SMEs is associated with better performance as measured by improved rates of survival, growth, improved decision-making procedures and superior financial performance. The services of a professional accountant can be invaluable in operating a successful business and the importance of accurate and timely financial information is essential.
In addition, research findings continue to show that, irrespective of jurisdiction, accountants, and especially small and medium-sized practitioners (SMPs), continue to be the preferred advisors to SMEs. SMPs have an in-depth knowledge and understanding of their SME clients and are therefore well-positioned to provide a range of services. These services include support on business development (strategy, marketing etc.), human resources and employment regulations as well as on management accounting and corporate advisory. Practitioners in some jurisdictions have specialized in becoming virtual CFOs, utilizing the cloud to service a number of businesses and provide appropriate, relevant advice, around the clock. Because of the level of trust between accountants and their clients, they are also in the ideal position to direct businesses to other reliable sources of advice.
An example of the way in which professional accountants have a key role in supporting the small business sector is succession planning and business transfers – see Encouraging Successful Exit Strategies – Passing the Baton.
An Evolving Evidence Base
There has been an overall increase in the level of data, research and knowledge available in recent years on SMEs globally. This includes:
- The World Bank annual ‘Doing Business’ Report provides a ranking of 190 different economies on the ease of doing business, which takes into account ten different topics: starting a business, dealing with construction permits; getting electricity; registering property; getting credit; protecting minority investors; paying taxes; trading across borders; enforcing contracts, resolving insolvency and labor market regulation. For example, around the world registering a business now takes an average of 23% of income per capita, compared to 27 days and 76% of income per capita in 2006.
- The OECD Scorecard Financing SMEs and Entrepreneurs 2019 is an annual publication providing information on debt, equity, asset-based finance, conditions for SME and entrepreneurship finance and recent policy measures. The 8th edition provides data from 46 countries and found that bank credit increased at a modest pace in many countries and declined in some others, whereas volumes were generally up for other sources, such as leasing, factoring, online alternative finance and venture capital investments. At the same time a growing share of SMEs relied on self-financing for their investment needs and cash flow requirements.
- The OECD SME and Entrepreneurship Outlook 2019 presents an overview of business conditions and policy frameworks. It offers policymakers new benchmarking tools and insights on good practices to help frame national SME and entrepreneurship policies.
- The Global Entrepreneurship Monitor (GEM) which for 17 years has provided evidence in over 100 countries on the entrepreneurial behavior and attitudes of individuals, considering the national context and how that impacts entrepreneurship. For example, in the latest 2018/2019 report in 47 economies assessing family business activity, nearly 20% are starting businesses that will be owned and/ or managed with family members.
- The Future of Business Survey jointly developed by the OECD, the World Bank and Facebook is producing timely information on how firms with a digital presence assess the current state and future outlook of their business, the main challenges they face and their involvement in international trade. For example, Financing and Women-owned Small Businesses: The Role of Size, Age and Industry.